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Patten v. Signator Insurance Agency Inc.

Issue Discussed: Judicial Review/Manifest Disregard

Submitted by John R. Cashin

Date Promulgated: March 13, 2006

Issue Addressed: Vacating an Arbitration Award on Grounds of Manifest Disregard of the Law.

In Patten v. Signator Insurance Agency the Fourth Circuit held that where an arbitrator disregarded the plain and unambiguous language of the governing arbitration agreement, the arbitrator failed to draw his award from the essence of the agreement and acted in manifest disregard of the law.

In 1972 Ralph F. Patten, began working as a sales agent for John Hancock Mutual Life Insurance Company in Washington D.C. In 1992 Patten signed a ‘’Mutual Agreement’’ that included an arbitration clause and a one year statute of limitations on all employment claims. In 1998 Patten became a branch manager and signed a ‘’Management Agreement’’ with the Hancock affiliate, Signator. This agreement superceded the previous agreement. It also contained an arbitration clause, but a filing period for claims was not included. The Management Agreement mandated that it was to be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. In 2001 Signator terminated Patten’s employment and alleged grounds of poor performance. Patten waited fourteen months before seeking arbitration of his claim for age discrimination.

Signator proceeded to arbitration and the parties participated in discovery and an exchange of potential witnesses. Signator then filed a motion for summary judgment on grounds that Patten’s claim was time-barred as more than one year had passed since his termination. The sole arbitrator dismissed the arbitration proceedings as time-barred and entered summary judgment for Signator without conducting a hearing on the merits. As a preliminary matter, he determined that the arbitration proceedings were governed by both the Mutual Agreement and the Management Agreement. While the arbitrator observed that the Management Agreement contained no notice requirement, he determined that it contained an implied term limit. The arbitrator referenced the Mutual Agreement for guidance and adopted its one year limitation.

Patten filed a motion in district court to vacate the arbitration award contending manifest disregard of the law. The district court characterized the arbitration decision as a mere misinterpretation of the agreement which did not constitute grounds to vacate the award. Patten appealed the decision to the Fourth Circuit.

In a 2-1 decision, the Fourth Circuit vacated the district court’s refusal to vacate the arbitration award and remanded the case for further proceedings. The court relied principally on the common law grounds for vacatur where the award fails to draw its essence from the contract, or the award evidences a manifest disregard of the law (Apex Plumbing Supply, Inc., v. U.S. Supply Co., 142 F. 3D 188, (4TH Cir. 1998).

Citing a series of Fourth Circuit opinions, the Court stated: ‘’Under our precedents, a manifest disregard of the law is established only where the arbitrator understands and correctly states the law but proceeds to disregard the same. Moreover, an arbitration award does not fail to draw its essence from the agreement merely because a court concludes that an arbitrator misread the contract. An arbitration award fails to draw its essence from the agreement when the result is not rationally inferable from the contract.’’ (internal quotation marks omitted). (See Remmey v. Paine Webber, Inc., 32 F. 3d 143 (4th in 1994); Upshur Coal Corp., v. United Mine Workers, Dist. 31, 933 F2d 225 (4TH Cir. 1991); Int’l Union, United Mine Workers of Am v. Marrowbone Dev. Co., 232 F3d 383 (4th Cir. 2000)

The Fourth Circuit found that the arbitrator disregarded the plain and unambiguous language of the agreement when he concluded it contained an implied one-year limitations period. The arbitrator also failed to recognize that Massachusetts law was to govern the contract and that Massachusetts law should have provided guidance on the issue. Under Massachusetts law, claims of wrongful termination are subject to a three year statute of limitations.
*John R. Cashin is General Counsel – Group Reinsurance at Zurich Financial Services, Zurich, Switzerland. He is an ARIAS Certified Arbitrator. At Zurich his responsibilities include insurance regulation, reinsurance claims, reinsurance arbitrations and contract wording. He joined Zurich in 2004 from the law firm of Stroock & Stroock & Lavan in New York City. Prior to his law firm practice he served as Deputy Superintendent of the New York State Insurance Department.